I provide independent research of technology companies and was previously one of two analysts that determined the technology holdings for Atlantic Trust (Invesco's high net worth group), a firm with $15 billion under management. Before joining Atlantic Trust I was the Internet Security Software analyst for Smith Barney (where I authored the most comprehensive industry report “Internet Security Software: The Ultimate Internet Infrastructure”) and an Enterprise Server Hardware analyst at Salomon Brothers. Prior to becoming an equity analyst, I spent 16 years at IBM in a variety of sales and manufacturing positions. I have a B.S. in Industrial Engineering from Stanford University and a Postgraduate Diploma in Economics from the University of Sussex, England.

On February 7 David Einhorn went public with his proposal for Apple to issue preferred shares and filed a lawsuit against the company. He owned about one million shares in Apple and while he was successful in getting Apple to drop one of the amendments in its proxy I believe he was only one factor behind the increase in the share buyback and increased dividend announced on April 23.

Tim Cook had already shown a break from Steve Jobs by initiating a dividend and buyback program in March 2012 only about six months after Jobs had passed away. He also knew that the company would be generating about $7 billion in free cash flow in the March quarter to be added to its $137 billion. The initial program of $45 billion and only buying enough shares to offset dilution would not be enough to satisfy investors.

At least Icahn’s request is more straight forward than Einhorn’s and is essentially in-line with management’s plans. If Apple were to respond to Carl Icahn I expect it will wait until at least the next earnings announcement in October to announce any changes to its share buyback plan and even then I believe it would only be an acceleration which is what Icahn is lobbying for.

Apple may already be buying more than what a pro-rata amount would be in the September quarter since the company does have about $40 billion in U.S. based cash it could tap.

Apple will have to take on additional debt to fund the $60 billion buyback by December 2015 unless it decides to bring back overseas cash and investments. Currently it is not quite generating enough new U.S. cash to fund its dividend and if the company increases it (the earliest would be in April 2014 and almost nobody is clamoring for them to do this) management will have to start dipping into what it already has onshore. The wildcard to this is if the U.S. government changes the tax law so that companies can bring back cash at a lower tax rate.

Management is well aware of its stock price, valuation and the interest rate environment. They are also the best ones positioned to have as good an outlook as anyone what their revenue, profits and cash flows will look like over the next six to twelve months.

While historically company management’s have been poor buyers of their shares, given that Apple has such a large amount of cash and investments (about 17% of its market cap when you subtract out the $17 billion in debt, keep $20 billion in a kitty to run the company and fully tax the overseas cash at 35%) and is trading at about 12.5 times its earnings even at $500 it does appear that buying back shares and in an accelerated mode would be a good use of its cash.

I don’t buy the argument that Apple should make a large acquisition. It is not in Apple’s DNA, large acquisitions more times than not tend to not work out and buying a company just to add to a company’s growth rate I think is a bad reason. Filing in technology holes tends to work better which has been Apple’s mode of operation.

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